Before making spending decisions, the Government must learn to count

What should George Osborne cut? How should he cut it? And how should those cuts be sold? These questions will be investigated in our week-long series on the Spending Review, which begins with this article by Peter Hoskin. Follow Peter on Twitter.

What if I told you that, as he prepares to deliver his latest Spending Review on 26th June, George Osborne can’t count? He has plenty of important decisions to make: should benefits be cut ahead of defence spending? Should schools, health and aid be protected from the axe? Should he ice the Department for Culture, Media and Sport? But, when it comes to it, he doesn’t even know that 2 + 2 = 4.

Okay, so I’m exaggerating. But it’s a fisherman’s tale with some truth to it. For years now, successive Chancellors haven’t been able to count as well as they would like. It’s got nothing to do with their respective educations, nor with their ability, but with the departmental machinery at their disposal. The abacus on Mr Osborne’s desk is wonky. Its beads do not add up, and it does not give the proper answers.

A good example of the problem is the Treasury’s COINs (or Combined Online Information System) database, which is meant to tot up spending across Whitehall. A department buys a box of paperclips, and adds it to the database – simple, yes? But the Treasury has had trouble with this set-up for years. Sometimes the receipt for the paperclips falls behind a filing Cabinet. Sometimes it gets mixed up with the one for Dave from IT’s lunch. And, even when the system works, the result is a near-unintelligible list of thousands of items of spending. As one civil servant lamented to me before the last election, “it’s full of junk”.

Since then, the Coalition has done much to improve the collection and exhibition of spending figures. In June 2010, it put 120 gigabytes of COINs data online for public view – still, I think, the largest single release of government data in this country – with the idea that a thousand citizen statisticians would swarm all over it, and come up with ways to make it more presentable. And they have started publishing what are called the “Whole of Government Accounts”, which outline the combined fiscal positions of over 1,500 public sector bodies. Transparency isn’t just being used to inform the public, but also to make bureaucrats add up better.

But problems remain – and they become apparent when you sift through individual departmental accounts. The truth is, some are better at this accountancy lark than others. There are still huge inconsistencies in everything from how individual departments report their findings to how they measure their own spending year-by-year. “It’s such a mess,” says another civil servant to me now, “and it wouldn’t be allowed in the private sector.” And remember: these are the numbers on which Mr Osborne is basing his Spending Review.

And that, sadly, is not the sum of the Chancellor’s counting difficulties. The bottom-line cost of a spending programme is one thing, but what about its value? How does the Treasury, and the taxpayer, know that the money was worth spending in the first place? All too often, we don’t – and, again, this is a problem that goes back some time. New Labour, and especially Gordon Brown, did much to undermine the inconvenient, little concept of value in the public finances. Spending was chalked up as “investment”, and a good in itself. The effectiveness of policy was consistently measured by its price-tag, the higher the better.

Here, as well, a change of Government has brought about some improvement. The words “social return on investment” have percolated through the Conservatives’ work, from Chris White MP’s Public Services Act to Iain Duncan Smith’s social justice agenda. And this, to quote the Department for Work and Pensions, is “an analytical method that incorporates social, environmental and economic costs and benefits into decision making, providing a fuller picture of how value is created or destroyed.” Or, in other words, spending isn’t measured by spending alone. It’s measured by how many people it returns to work, or by how many lung transplants it yields, or by how it enriches an area – and more.

But this thinking has been applied patchily. Even departments that are firmly in the business of Changing Lives™, such as Michael Gove’s education department, don’t pay enough attention to whether their spending actually does what it’s meant to. A recent report from Reform – summarised by Andrew Haldenby on this site – suggested that there is no link between higher funding for schools and better results, nor between higher funding and better teaching. Whether similar can be said for other areas of ring-fenced spending, we can debate. But the very existence of ring-fences speaks more to political priorities than to a proper evaluation of spending, its consequences and its worth.

How could this be fixed? As with all culture change, it’s difficult, but there are practical recommendations contained in a report published a couple of years ago by the Centre for Social Justice – which may help explain Iain Duncan Smith’s interest in the subject – and titled Outcome Based Government: How to improve spending decisions across government. Some of these concern the cogs and wheels of Whitehall’s machinery, such as how new staff are recruited and trained. But the most significant concern those doing the controlling. Although the Coalition has done well to publish business plans for each department, there could still be more clarity about what they hope to achieve by each policy.

Perhaps the time has come for what the CSJ calls, after the Office for Budget Responsibility, an “Office for Spending Effectiveness”. The Cabinet Office is, it’s true, already snuffling in that direction with its “What Works Network”, but, for now, that only covers four policy areas. If George Osborne is to deliver more savings, and deliver them wisely, then he’s going to need more support along Whitehall – and a new abacus.